Should I Buy A Business Vehicle to Save on Taxes This Year?

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Now that Halloween is over, you may start to look at year-end tax planning and be pretty scared of what you are facing, if you’ve had a good year. You are looking at that P&L and seeing all that profit, you haven’t paid into estimated taxes, and you are looking at what you can do to save on taxes.

One of the common suggestions you’ll see, especially on TikTok, is that you should buy a car, put it in the company’s name, take the depreciation and save on taxes this year! After all, you need a car anyways, so why not write it off, right?

Well, not so fast! There are definitely some things you should consider first, before you buy that car.

TL;DR: Buying a business vehicle for tax deductions isn’t as simple or easy as it appears. And there are some hidden costs along the way, where it may not be as beneficial as you think. But for some business owners, it can really help reduce this year’s tax liability.

The Tax Code: Business Vehicles

First, let’s take a look at the U.S. Tax Code to figure out how the tax deduction works. This will tell us a lot about the requirements and if it makes sense to buy a business vehicle.

Section 179 – Depreciation

§ 179 is the code section that lets us expense certain capital assets as expenses in the year that the asset is bought. See, normally a business vehicle would be a capital asset, not an expense. The deduction would be taken over several years, as we “use up” the asset in a process called depreciation.

So § 179 is a great code section for small business owners, to be able to immediately take that deduction for capital assets instead of over many years of the useful lifespan of the asset.

As an aside: For accrual based companies, depreciation is a non-cash expense that ends up on the P&L. And one of the reasons that EBITDA can be misleading. After all, you’d have to spend cash to replace this asset at some point (hello CapEx).

Is the Vehicle a Business Asset?

To be able to take advantage of § 179, the first hoop we have to get through is the question “Is this a business asset?”

You may think this is an easy question to answer, but not so fast! First, is it titled and registered in the business’s name? This is really important if you are going to finance the purchase, since the loan must also be in the business’s name.

If you are a newer business or one that doesn’t have a really long track history of good years, the financing company may not want to loan you the money to make the purchase in the business’s name. Or they may want a personal guarantee.

The auto insurance also needs to follow the title and registration. So if the vehicle is in the business name, the insurance needs to be as well. Remember though that business auto insurance is typically higher than personal insurance. And your business lease and other contracts may require higher limits for business autos than for personal autos, thus costing more money.

Ordinary and Necessary

Another question will be “is this a ordinary and necessary business expense?” This is required for business deductions.

An ordinary expense is one that is common and accepted in your industry. So having a big pickup truck for a landscaping or construction crew would be pretty common. Having a delivery van for a bakery would be pretty common.

A necessary expense is one that is helpful and appropriate for your business. Again, having a delivery van to make it so that you can do catering for large events would be helpful. Having a big truck that can haul a trailer with lots of equipment and supplies would be helpful and appropriate for a landscaping or construction company.

But for a professional services firm like my law firm, would a delivery truck be “ordinary and necessary?” There are situations maybe where I could justify it, but I’m not delivering things for BUSINESS purposes that can’t fit in a standard SUV (think paper files). It makes a lot more sense to say I need an SUV or minivan that holds a lot of people because I’m taking them to court, lunch, meetings, etc. That would make it ordinary and necessary.

Can’t Be For Personal Use

One of the big traps for small business owners, especially for the owners, is that the vehicle cannot be for personal use. Pretty easy when you think of a big delivery truck, right? But what about a normal passenger vehicle, like a car or SUV? Even that pickup truck for landscaping and construction could be used for personal reasons.

To qualify as a business asset, the vehicle must be used at least 50% in the business and for business purposes.

It’s on you, the business owner and taxpayer, to prove that the vehicle is used in the business. That’s why you need to keep contemporaneous logs about the use of the vehicle. Log the beginning mileage when you purchase the vehicle (or the mileage at the beginning of the year, after the year you purchased it) and the year-end mileage. And then you need to keep track of the miles in between.

You should be logging each trip. This would be your starting point and destination, how many miles, and what the business purpose is (like visiting a customer or client, going to a worksite, going to court, etc). You can make this easier by using a fleet tracking hardware and software in your vehicle (and the IRS and courts would see this as more reliable than a handwritten log). Any trips that you can’t justify as a business purpose would be considered personal. Including commuting.

Don’t forget that the maintenance and repairs should also be taken care of by the business. If you are paying for gas, maintenance, and repairs out of your personal account, it looks more like a personal vehicle instead of a business vehicle.

Any personal use of your vehicle will reduce the depreciation deduction as well. So let’s say that you use it 65% of the time for business and 35% for personal. You meet the 50% business use threshold to get a deduction, but it is reduced by the 35% you used the vehicle for personal use.

Hint from Lots of Actual Practice: it’s hard to justify that the vehicle is a business vehicle if it is your only vehicle. Most need a separate “daily driver” kind of car that you use for personal reasons. This goes a long ways to convincing an auditor or a judge that this is in fact a business vehicle.

179 Limits for SUVs

Since this is such an attractive deduction for business owners, it is easy to see how it would be taken advantage of. About 99.9% of all businesses in the US are small businesses. That’s over 33 million small businesses and a lot of potential personal cars becoming business cars to take advantage of the tax deduction.

So, Congress added some limits to the tax code just to prevent people from taking unfair advantage of the deduction.

§ 179(b)(5) limits SUVs that can be depreciated as a current year business expense. The cost of a business SUV, under 14,000 pounds gross weight, cannot exceed $25,000, adjusted for inflation. For 2024, that’s $30,500.

They know you like that SUV and may well be using that for personal reasons. So beware of the limit.

Section 168(k) – Bonus Depreciation

One thing that I didn’t talk about in § 179 depreciation is that there are quite a few other limits that apply. Two additional major limitations are (1) the maximum depreciation expense deduction which is $1,220,000 for 2024 for full deduction and phases-out completely at $3,050,000 and (2) you can only take the deduction up to your taxable income. The rest is deferred.

This means that if you have purchased a lot of other depreciable expenses and/or don’t have taxable income, you can’t take the § 179 depreciation deduction. That’s where § 168(k), bonus depreciation, comes in handy. There are no limits under bonus depreciation.

From September 27, 2017, through December 31, 2022, companies would get 100% depreciation on property purchased and placed in service. However, in 2024 it is only 60% and in 2025, it’s 40%. That’s why you saw such a rush at the end of 2022 to buy business vehicles, since the deduction was decreasing.

Any depreciation that is not taken during the first year can be depreciated under the general depreciation system in future years.

Since the bonus depreciation is less than 100%, it is generally advisable to apply § 179 depreciation, if you qualify. However, this can be useful if you can’t use § 179 for any reason.

Section 280F – Limitation for Luxury Vehicles

Like the SUV limitation mentioned above, Congress knows that you pesky taxpayers are just trying to scam your way to a lower tax burden. And they saw that people were getting all these nice cars and making them business expenses. They just couldn’t have that, so they added § 280F to limit what you could get.

This is where you’ll find the 6,000 pound limit. In § 280F(d)(5)(ii), passenger automobiles means any vehicle under 6,000 pounds. And under § 280F(a)(1)(A), passenger vehicles (under 6,000 lbs) are limited to $20,400 depreciation deduction in the first year if bonus depreciation applies. And only $12,400 if bonus depreciation does not apply.

If the vehicle is over 6,000 pounds, then this limitation does not apply. That’s why people talk about large trucks and SUVs over 6,000 pounds – to take advantage of the full deduction.

Recapture of Excess Depreciation

§ 280F also contains a “fun” little section that will trap many business owners in future tax years (future as in after the year that they buy a business vehicle): depreciation recapture!

Let’s say that you’ve followed all the rules thus far, making sure to buy the vehicle in the business’s name, it’s an ordinary and necessary expense for your business, and that first year, you did really well on keeping track of the mileage to make sure you used it at least 50% for business purposes.

But in year two, you got a little lazy. You didn’t track the mileage like you should and now you cannot substantiate the business use of the vehicle. Congress knows about this little trick and they included depreciation recaputre in § 280F(b)(2) so that you would have to include the excess depreciation that you took in year one as taxable income in year two. Ouch!

Section 1245 – Depreciation Recapture at Time of Sale

Depreciation reduces the book value of the asset you bought. Think about it this way: when you purchased a $50,000 vehicle and then use it, it’s no longer worth $50,000 – it’s now worth some lower value. Now, we don’t want to be looking at the Blue Book value every day or trying to figure out a constantly changing number, so we assign a book value. It’s the purchase price minus the accumulated depreciation.

So if you use § 179 depreciation or bonus depreciation, you’ve reduced the book value. Let’s say you take $30,500 in depreciation in the first year, reducing your taxable income and the book value is $19,500. Then in year two, you sell the vehicle for $40,000. That’s a difference of $20,500 and that’s profit. And now you are paying taxes on that profit because of depreciation recapture under § 1245.

So that means that you’ve just deferred that tax.

Now, if you sold it for $19,000, less than the $19,500 book value, there would be no recapture. So if you plan on holding onto the vehicle for an extended period of time, when the value has dropped more than the depreciation, you will be ok. But don’t plan on buying a new car every year (especially in a market where used cars are holding value really well).

What if I don’t take Depreciation?

Oh, this is a bad situation. Because under § 1245(a)(2), the “recomputed basis” (aka the purchase price minus depreciation) is adjusted by the allowed or allowable depreciation or amortization.

This means, even if you don’t take the depreciation, you still would have to calculate the basis as if you did actually take it. So you might as well take it.

So if you buy a business vehicle, you definitely want to take the depreciation. Just know that if you sell it at a profit, after this new recomputed basis, you’ll be paying it back.

Frequently Asked Questions about Business Vehicles and Tax Deductions

Can I wrap it in my company’s name and logo to make it all business use as a marketing campaign?

The IRS sees you trying to make your personal use of the vehicle in business use. While you think you are being sneaky, claiming it as marketing, that’s not going to work.

Yes, the cost of the wrap is deductible. But it’s not going to turn the personal use of your vehicle into business use.

I need a fancy car for my business image. That’s deductible, right?

Ha! Despite what the TikTokers and other influencers say, you need to meet all the requirements we’ve talked about to make vehicle use for business purposes. Maintaining an image as a successful business owner by having a fancy car is not sufficient to make it a business purpose. Sorry!

You Don’t Like TikTok Influencers, do you?

I don’t like the ones that are out there giving you really bad tax, legal, or business advice or information. They go viral because they are telling people what they want to hear, not necessarily the truth. Some are good, some are bad. It’s hard to tell the difference unless you know what’s really going on.

Unless they are actually a licensed CPA or lawyer, I really wouldn’t trust their advice. And even then, you’ll need to take the rules to see if they apply to your situation.

Remember, it’s you that will have to survive the audit. And will have to pay up if Uncle Sam comes after you. The content creator doesn’t have any skin in the game and won’t face any repercussions if you follow their advice.

Does the 280F limitation apply to my passenger van?

The limits do not apply to certain vehicles that are obviously business vehicles – ambulances, hearses, large passenger vans, and vehicles purchased for hire — taxis, shuttle buses, etc. or if you are leasing vehicles (think car rental companies).

What about the Standard Mileage Deduction?

In 2024, the standard mileage deduction is 67 cents per mile. If you use the standard mileage deduction, you cannot also use the actual costs deduction method, which includes § 179 and bonus depreciation. Part of the reason is that the standard mileage deduction already includes depreciation, so no double dipping.

Many business owners find this easier – using the standard deduction for business miles driven on a personal vehicle – than they do having the vehicle owned by the business. Because of may of the reasons discussed above.

Can I use a Like-Kind Exchange (1031) on a Business Vehicle?

So back in the olden days, you could trade-in one business vehicle for another, and defer the gain until you sold the last in the line of business vehicles. However, under the 2017 Tax Cut and Jobs Act, this was eliminated.

Now, you must pay the gain on the sale, even on a trade-in.

What Does Depreciation Save You?

It’s important to remember that depreciation is a deduction, not a credit.

That means when you are calculating your taxes the savings is not a $1 for $1 like it is with a credit. Instead, you take your taxable income, subtract out the depreciation deduction, and then multiple it by your tax rate.

Let’s say that you are at the very top tax rate of 37% in 2024. You have a $30,500 depreciation deduction. That saves you $11,285 in taxes. But you’ve paid at least $30,500 and probably a lot more for that business vehicle.

If you didn’t need a new vehicle, was it really worth spending all of that money (plus ongoing maintenance, insurance, etc costs) just to get the $11,285 in tax savings? Wouldn’t you rather keep that cash in your bank account and pay the $11,285 in taxes?

Well… Should I Buy A Business Vehicle to Save on Taxes?

Like all legal and finance questions, it’s a big “it depends.” While the idea is attractive, you have to make sure that you are following all the rules so that you can legitimately take the deduction. And it may not save you as much money as you think you are – since it is a deduction and not a credit.

In addition, buying a business vehicle means that you may have to pay higher interest or insurance rates. You also have to keep a log to substantiate the business use of the vehicle. These added burdens may not make the savings worth it.

However, if you legitimately need a business vehicle, then by all means, buy the vehicle and take the deduction.

But those that think you’ll be taking that fancy G Wagon as a business vehicle, be careful. The auditors are aware, and it does make for a nice, attractive audit target.

Don’t Let the Tax Tail Wag the Dog

One thing I am always telling my Fractional CFO clients is that we should not let the tax tail wag the dog. What does that mean?

Basically, we need to make good business financial moves and not just do them for tax savings. Especially since most moves are for deductions and not credits, we end up spending more than we would have otherwise.

Buying a new vehicle is a perfect example of this. Do we really need a car? If it is going to save us say $11k in taxes, why are we spending upwards of $50,000 or more?

The Value of a Fractional CFO

Is this the kind of business planning help that you need? Then maybe you should consider the Fractional Chief Financial Officer service from Springboard Legal.

Buying a business vehicle is a common scenario for our clients that are projecting significant profits for year-end. During the discussion, we can go through the benefits and drawbacks for buying a vehicle in YOUR business, which matches with growth and investment plans for next year, as well as your needs for cash.

It’s one of the strategic business decisions that we help our client business owners make everyday.